Tapping Pipelines for Profits

The first oil pipeline was a simple affair: lengths of 2 in. wrought iron pipe that ran five miles, from a Pennsylvania oilfield to a train station in Oil Creek.

But that pipeline, built by the Oil Transport Association in 1859, started a revolution. Oil pipelines have changed how and where oil is found, refined and sold, and have turned America into one of the world’s leading oil producers.

Most importantly for investors, they don’t just pump oil, they pump profits…

Pump it up

Pipelines filled with crude oil, home heating oil, natural gas and other liquids are everywhere. The U.S., in fact, has the most pipelines in the world, about 2.5 million miles at last count.

And none of them would have happened without the Teamsters Union.

When oil was first found in Pennsylvania, it was hauled in converted whiskey barrels by Teamsters to the nearest railroad, then shipped by train to New York City.

The problem was that the Teamsters charged more for the five-mile horse ride than the railroad did for the remainder of the trip.

When the Teamsters, at the time a transportation monopoly, refused to lower their fees, an oil company built the first pipeline. And an entire industry was born.

A very profitable industry, and one that Kent has been recommending for some time.

How Pipelines Work

Today’s computer monitored and controlled pipelines are a far cry from that five-mile pipe.

High tech data centers monitor oil flow, pipeline conditions, pumps and valves using sensors and cameras. Pipeline operators also fly over lines, drive alongside them with high tech “sniffers” to detect leaks, and conduct investigative digs around the lines.

Periodically, companies send high resolution inspection tools, known as” smart pigs,” through the lines to look for dents, leaks, corrosion and other problems. These tools are so sensitive that, by using ultrasonic or electromagnetic technology, they can find a pit the size of a grain of rice in the pipe wall.

The result is that pipelines are 40 times safer than rail tanks, and 100 times safer than road tanks for
transporting energy, according to the USA Association of Pipelines. In the U.S., oil pipeline spills amount to about one gallon per million barrel-miles. (One 42-gallon oil barrel transported one mile would equal one barrel mile.)

The Money is in the Middle

Oil and natural gas pipelines occupy a portion of the sector called the “midstream:” the middle of the oil and gas supply chain, between the oil fields and the consumer. Midstream companies connect the “upstream” exploration and production companies to the “downstream” retail, refining, and marketing channels.

If your goals are to expose yourself to strong returns in both dividends and share appreciation, the midstream is the place to be.

Many of the best plays are Master Limited Partnerships (MLPs). The Alerian MLP Index, which tracks the 50 most prominent energy MLPs, boasts a total return of 462% over the last 10 years, climbing 15.6% this year alone.

The best part is, when you invest in the midstream, you’re far less susceptible to oil and gas price fluctuations. Midstream companies get paid regardless of the price of oil. And as demand for energy grows, you collect easy profits.

One of Kent’s favorite midstream companies is Magellan Midstream Partners LP (NYSE: MMP), which owns the longest refined petroleum products pipeline system in the country . Since joining the Energy Advantage portfolio 16 months ago, Magellan Midstream’s share price has skyrocketed by over 70%, hitting its all-time high earlier this month. The company has steadily increased its dividends over the last seven years, too, from $1.27/share in 2007 to $2.51/share this year, a 97% jump and a current yield of 3.1%.

Part of the reason for its success is that the company shrewdly buys valuable assets on the cheap. (When BP was forced to sell some its assets following the Gulf oil spill, Magellan scooped up the best ones at below market prices.)

Magellan Midstream is just one of the nine MLPs in the Energy Advantage Portfolio. Six of them have posted double-digit gains since they were recommended. And that doesn’t include the high yields.

You see, pipeline companies don’t have to hope to strike oil or gas. They don’t have to play the oil futures market or worry about rebels shutting down Iraqi oil fields.

As long as someone in America is transporting oil or natural gas, they’re generating profits and income streams. And with the American energy industry setting new production records every year, the demand for pipeline owners and other midstream companies has never been greater.

Please Note: Kent cannot respond to your comments and questions directly. But he can address them in future alerts... so keep an eye on your inbox. If you have a question about your subscription, please email us directly at customerservice@oilandenergyinvestor.com

Dear Kent,
This is a general question regarding Oil & Gas in the Dakota’s, Texas, Montana and the East cost fields in general.
A while back you were with a group of men discussing the future of America regarding everything from resources to water to the economic meltdown of the country. Kind of like a brain storming of intelligent thinkers.
My Questions are as follows:
1). If the Petro Dollar were to be no more and or the Dollar were to collapse, how would that effect the production of oil and gas in the US and furthermore it’s importation of it?
2). Do you think oil would still continue to flow at the current rates?
3). Or rather would a large number of oil and gas fields be temporarily capped until the value of oil went back up?
I know this is a touches subject however, I feel it is one worth asking from an investors point of view. I am certain their other subscribers that would love to have you address this topic. Considering their are a fair number of professional investors all over the world who are predicting certain down conditions to one to vuition.
I hope to read your comments in the next issue of Money Map or Outstanding Investments soon!
Regards,
James Burston

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